ACCOUNTING
Problem 4-4A (P4-4A) Assign overhead costs using traditional costing and ABC; compare results.
Mendocino Corporation produces two grades of wine from grapes that it buys from California growers. It produces and sells roughly 3,000,000 liters per year of a low-cost, high-volume product called CoolDay. It sells this in 600,000 5-liter jugs Mendocino also produces and sells roughly 300,000 liters per year of a low-volume, high-cost product called LiteMist. LiteMist is sold in 1-liter bottles. Based on recent data, the CoolDay product has not been as profitable as LiteMist. Management is considering dropping the inexpensive CoolDay line so it can focus more attention on the LiteMist product. The LiteMist product already demands considerably more attention than the CoolDay line.
Tyler Silva, president and founder of Mendocino, is skeptical about this idea. He points out that for many decades the company produced only the CoolDay line, and that it was always quite profitable. It wasn't until the company started producing the more complicated LiteMist wine that the profitability of CoolDay declined. Prior to the introduction of LiteMist, the company had simple equipment, simple growing and production procedures, and virtually no need for quality control. Because LiteMist is bottled in 1-liter bottles, it requires considerably more time and effort, both to bottle and to label and box than does CoolDay. The company must bottle and handle 5 times as many bottles of LiteMist to sell the same quantity as CoolDay. CoolDay requires 1 month of aging; LiteMist requires 1 year. CoolDay requires cleaning and inspection of equipment every 10,000 liters; LiteMist requires such maintenance every 600 liters.
Tyler has asked the accounting department to prepare an analysis of the cost per liter using the traditional costing approach and using activity-based costing. The following information was collected.
CoolDay LiteMist
Direct materials per liter $0.40 $1.20
Direct labor cost per liter $0.25 $0.50
Direct labor hours per liter 0.05 0.09
Total direct labor hours 120,000 25,000
Activity Cost Pools Cost Drivers Estimated Overhead Expected Use of Cost Drivers Expected Use of Cost Drivers per Product
CoolDay LiteMist
Grape processing Cart of grapes $ 145,860 6,600 6,000 600
Aging Total months 396,000 6,600,000 3,000,000 3,600,000
Bottling and corking Number of bottles 270,000 900,000 600,000 300,000
Labeling and boxing Number of bottles 189,000 900,000 600,000 300,000
Maintain and inspect equipment Number of inspections 240,800 800 350 450
$1,241,660
Instructions
Answer each of the following questions. (Round all calculations to three decimal places.)
A. Under traditional product costing using direct labor hours, compute the total manufacturing cost per liter of both products.
B. Under ABC, prepare a schedule showing the computation of the activity-based overhead rates (per cost driver).
C. Prepare a schedule assigning each activity's overhead cost pool to each product, based on the use of cost drivers. Include a computation of overhead cost per liter.
D. Compute the total manufacturing cost per liter for both products under ABC.
E. Write a memo to Tyler Silva discussing the implications of your analysis for the company's plans. In this memo provide a brief description of ABC, as well as an explanation of how the traditional approach can result in distortions.
Check: (a) Cost/liter—C.D. $1.078; (c) Cost/liter—C.D. $.241
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Sunday, August 21, 2011
The August Manufacturing Company in Rochester, Minnesota, assembles and tests electronic components used in handheld video phones
ACCOUNTING
Product costing in an ABC system (9th Edition)
The August Manufacturing Company in Rochester, Minnesota, assembles and tests electronic components used in handheld video phones. Consider the following data regarding component T24:
The activities required to build the component follow:
Requirements
1. Complete the missing items for the two tables.
2. Why might managers favor this ABC system instead of August's older system, which allocated all conversion costs on the basis of direct labor?
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Product costing in an ABC system (9th Edition)
The August Manufacturing Company in Rochester, Minnesota, assembles and tests electronic components used in handheld video phones. Consider the following data regarding component T24:
The activities required to build the component follow:
Requirements
1. Complete the missing items for the two tables.
2. Why might managers favor this ABC system instead of August's older system, which allocated all conversion costs on the basis of direct labor?
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On February 1, 2011 Punto Company purchased 95% of the outstanding common stock of Sara Company and 85% of the outstanding common stock of Rob Company
ACCOUNTING
PROBLEM 3-8 Intercompany Items, Two Subsidiaries
On February 1, 2011, Punto Company purchased 95% of the outstanding common stock of Sara Company and 85% of the outstanding common stock of Rob Company. Immediately before the two acquisitions, balance sheets of the three companies were as follows:
Punto Sara Rob
Cash $165,000 $ 45,000 $17,000
Accounts receivable 35,000 35,000 26,000
Notes receivable 18,000 0 0
Merchandise inventory 106,000 35,500 14,000
Prepaid insurance 13,500 2,500 500
Advances to Sara Company 10,000
Advances to Rob Company 5,000
Land 248,000 43,000 15,000
Buildings (net) 100,000 27,000 16,000
Equipment (net) 35,000 10,000 2,500
Total $735,500 $198,000 $91,000
Accounts payable $ 25,500 $ 20,000 $10,500
Income taxes payable 30,000 10,000 0
Notes payable 0 6,000 10,500
Bonds payable 100,000 0 0
Common stock, $10 par value 300,000 144,000 42,000
Other contributed capital 150,000 12,000 38,000
Retained earnings (deficit) 130,000 6,000 (10,000)
Total $735,500 $198,000 $91,000
The following additional information is relevant.
1. One week before the acquisitions, Punto Company had advanced $10,000 to Sara Company and $5,000 to Rob Company. Sara Company recorded an increase to Accounts Payable for its advance, but Rob Company had not recorded the transaction.
2. On the date of acquisition, Punto Company owed Sara Company $12,000 for purchases on account, and Rob Company owed Punto Company $3,000 and Sara Company $6,000 for such purchases. The goods purchased had all been sold to outside parties prior to acquisition.
3. Punto Company exchanged 13,400 shares of its common stock with a fair value of $12 per share for 95% of the outstanding common stock of Sara Company. In addition, stock issue fees of $4,000 were paid in cash. The acquisition was accounted for as a purchase.
4. Punto Company paid $50,000 cash for the 85% interest in Rob Company.
5. Three thousand dollars of Sara Companys notes payable and $9,500 of Rob Company's notes payable were payable to Punto Company.
6. Assume that for Sara, any difference between book value and the value implied by the purchase price relates to subsidiary land. However, for Rob, assume that any excess of book value over the value implied by the purchase price is due to overvalued buildings.
A. Give the book entries to record the two acquisitions in the accounts of Punto Company.
B. Prepare a consolidated balance sheet workpaper immediately after acquisition.
C. Prepare a consolidated balance sheet at the date of acquisition for Punto Company and its subsidiaries.
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PROBLEM 3-8 Intercompany Items, Two Subsidiaries
On February 1, 2011, Punto Company purchased 95% of the outstanding common stock of Sara Company and 85% of the outstanding common stock of Rob Company. Immediately before the two acquisitions, balance sheets of the three companies were as follows:
Punto Sara Rob
Cash $165,000 $ 45,000 $17,000
Accounts receivable 35,000 35,000 26,000
Notes receivable 18,000 0 0
Merchandise inventory 106,000 35,500 14,000
Prepaid insurance 13,500 2,500 500
Advances to Sara Company 10,000
Advances to Rob Company 5,000
Land 248,000 43,000 15,000
Buildings (net) 100,000 27,000 16,000
Equipment (net) 35,000 10,000 2,500
Total $735,500 $198,000 $91,000
Accounts payable $ 25,500 $ 20,000 $10,500
Income taxes payable 30,000 10,000 0
Notes payable 0 6,000 10,500
Bonds payable 100,000 0 0
Common stock, $10 par value 300,000 144,000 42,000
Other contributed capital 150,000 12,000 38,000
Retained earnings (deficit) 130,000 6,000 (10,000)
Total $735,500 $198,000 $91,000
The following additional information is relevant.
1. One week before the acquisitions, Punto Company had advanced $10,000 to Sara Company and $5,000 to Rob Company. Sara Company recorded an increase to Accounts Payable for its advance, but Rob Company had not recorded the transaction.
2. On the date of acquisition, Punto Company owed Sara Company $12,000 for purchases on account, and Rob Company owed Punto Company $3,000 and Sara Company $6,000 for such purchases. The goods purchased had all been sold to outside parties prior to acquisition.
3. Punto Company exchanged 13,400 shares of its common stock with a fair value of $12 per share for 95% of the outstanding common stock of Sara Company. In addition, stock issue fees of $4,000 were paid in cash. The acquisition was accounted for as a purchase.
4. Punto Company paid $50,000 cash for the 85% interest in Rob Company.
5. Three thousand dollars of Sara Companys notes payable and $9,500 of Rob Company's notes payable were payable to Punto Company.
6. Assume that for Sara, any difference between book value and the value implied by the purchase price relates to subsidiary land. However, for Rob, assume that any excess of book value over the value implied by the purchase price is due to overvalued buildings.
A. Give the book entries to record the two acquisitions in the accounts of Punto Company.
B. Prepare a consolidated balance sheet workpaper immediately after acquisition.
C. Prepare a consolidated balance sheet at the date of acquisition for Punto Company and its subsidiaries.
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Comparative financial statement data of Danfield, Inc., follow
ACCOUNTING
P15-26A Using ratios to evaluate a stock investment
Comparative financial statement data of Danfield, Inc., follow:
DANFIELD, INC.
Comparative Income Statement
Years Ended December 31, 2012 and 2011
2012 2011
Net Sales $467,000 $428,000
Cost of goods sold 237,000 218,000
Gross profit $230,000 $210,000
Operating expenses 136,000 134,000
Income from operations $94, 000 $76, 000
Interest expense 9,000 10,000
Income before income tax $85,000 $66,000
Income tax expenses 24,000 27,000
Net income $61,000 $39, 000
DANFIELD, INC.
Comparative Income Statement
Years Ended December 31, 2012 and 2011
2012 2011 2010*
Current assets:
Cash $97,000 $95,000
Current recievables, net 112,000 118,000 $102,000
Inventories 145,000 163,000 203,000
Prepaid expenses 12,000 5,000
Total current assets $366,000 $381,000
Property, plant, and equipment, net 211,000 179,000
Total assets $577,000 $560,000 598,000
Total current liabilities $225,000 $246,000
Total liabilities $339,000 $343,000
Preferred stock, 3% 108, 000 108,000
Common stockholders equity , no par 130,000 109, 000
Total liabilities and stockholders equity $577,000 $560,000
• Selected 2010 amounts
1. Market price of Danfield’s common stock: $86.58 at December 31, 2012, and $46.54 at December 31, 2011.
2. Common shares outstanding: 12, 000 during 2012 and 10,000 during 2011 and 2010.
3. All sales on credit.
Requirements
1. Compute the following ratios for 2012 and 2011:
a. Current ratio
b. Times-interest earned ratio
c. Inventory turnover
d. Gross profit percentage
e. Debt to equity ratio
f. Rate of return on common stockholder’s equity
g. Earnings per share of common stock
h. Price/earnings ratio
2. Decide (a) whether Danfield’s ability to pay debts and to sell inventory improved or deteriorated during 2012 and (b) whether the investment attractiveness of its common stock appears to have increased or decreased.
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P15-26A Using ratios to evaluate a stock investment
Comparative financial statement data of Danfield, Inc., follow:
DANFIELD, INC.
Comparative Income Statement
Years Ended December 31, 2012 and 2011
2012 2011
Net Sales $467,000 $428,000
Cost of goods sold 237,000 218,000
Gross profit $230,000 $210,000
Operating expenses 136,000 134,000
Income from operations $94, 000 $76, 000
Interest expense 9,000 10,000
Income before income tax $85,000 $66,000
Income tax expenses 24,000 27,000
Net income $61,000 $39, 000
DANFIELD, INC.
Comparative Income Statement
Years Ended December 31, 2012 and 2011
2012 2011 2010*
Current assets:
Cash $97,000 $95,000
Current recievables, net 112,000 118,000 $102,000
Inventories 145,000 163,000 203,000
Prepaid expenses 12,000 5,000
Total current assets $366,000 $381,000
Property, plant, and equipment, net 211,000 179,000
Total assets $577,000 $560,000 598,000
Total current liabilities $225,000 $246,000
Total liabilities $339,000 $343,000
Preferred stock, 3% 108, 000 108,000
Common stockholders equity , no par 130,000 109, 000
Total liabilities and stockholders equity $577,000 $560,000
• Selected 2010 amounts
1. Market price of Danfield’s common stock: $86.58 at December 31, 2012, and $46.54 at December 31, 2011.
2. Common shares outstanding: 12, 000 during 2012 and 10,000 during 2011 and 2010.
3. All sales on credit.
Requirements
1. Compute the following ratios for 2012 and 2011:
a. Current ratio
b. Times-interest earned ratio
c. Inventory turnover
d. Gross profit percentage
e. Debt to equity ratio
f. Rate of return on common stockholder’s equity
g. Earnings per share of common stock
h. Price/earnings ratio
2. Decide (a) whether Danfield’s ability to pay debts and to sell inventory improved or deteriorated during 2012 and (b) whether the investment attractiveness of its common stock appears to have increased or decreased.
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Bair Company is a manufacturer of standard and custom-designed bottling equipment
ACCOUNTING
Bair Company is a manufacturer of standard and custom-designed bottling equipment. Early in December 20x0 Lyan Company asked Bair to quote a price for a custom-designed bottling machine to be delivered in April. Lyan intends to make a decision on the purchase of such a machine by January 1, so Bair would have the entire first quarter of 20x1 to build the equipment. Bair’s pricing policy for custom-designed equipment is 50 percent markup on absorption manufacturing cost. Lyan’s specifications for the equipment have been reviewed by Bair’s Engineering and Cost Management departments, which made the following estimates for direct material and direct labor.
Direct material ............................................ $307,200
Direct labor (11,000 hours at $18) .................. 198,000
Manufacturing overhead is applied on the basis of direct-labor hours. Bair normally plans to run
its plant at a level of 15,000 direct-labor hours per month and assigns overhead on the basis of 180,000 direct-labor hours per year. The overhead application rate for 20x1 of $10.80 per hour is based on the following budgeted manufacturing overhead costs for 20x1.
Variable manufacturing overhead ......................... $1,166,400
Fixed manufacturing overhead .............................. 777,600
Total manufacturing overhead ................... $1,944,000
Bair’s production schedule calls for 12,000 direct-labor hours per month during the first quarter. If Bair is awarded the contract for the Lyan equipment, production of one of its standard products would have to be reduced. This is necessary because production levels can only be increased to 15,000 direct labor hours each month on short notice. Furthermore, Bair’s employees are unwilling to work overtime.
Sales of the standard product equal to the reduced production would be lost, but there would be no permanent loss of future sales or customers. The standard product for which the production schedule would be reduced has a unit sales price of $14,400 and the following cost structure.
Direct material ....................................................................... $ 3,000
Direct labor (250 hours at $18) .............................................. 4,500
Manufacturing overhead (250 hours at $10.80) .................. 2,700
Total cost ...................................................................... $10,200
Lyan needs the custom-designed equipment to increase its bottle-making capacity so that it will not have to buy bottles from an outside supplier. Lyan Company requires 5,000,000 bottles annually. Its present equipment has a maximum capacity of 4,500,000 bottles with a directly traceable cash outlay cost of 18 cents per bottle. Thus, Lyan has had to purchase 500,000 bottles from a supplier at 48 cents each. The new equipment would allow Lyan to manufacture its entire annual demand for bottles at a direct-material cost savings of 1.2 cents per bottle. Bair estimates that Lyan’s annual bottle demand will continue to be 5,000,000 bottles over the next five years, the estimated life of the special-purpose equipment.
Required:
Bair Company’s management plans to submit a bid to Lyan Company for the manufacture of the special-purpose bottling equipment.
1. Calculate the bid Bair would submit if it follows its standard pricing policy for special-purpose equipment.
2. Calculate the minimum bid Bair would be willing to submit on the Lyan equipment that would result in the same total contribution margin as planned for the first quarter of 20x1.
3. Suppose Bair has submitted a bid slightly above the minimum calculated in requirement (2). Upon receiving Bair’s bid, Lyan’s assistant purchasing manager telephoned his friend at Tygar Corporation: “Hey Joe, we just got a bid from Bair on some customized equipment. I think Tygar would stand a good chance of beating it. Stop by the house this evening, and I’ll show you the details of Bair’s bid and the specifications on the machine.” Is Lyan Company’s assistant purchasing manager acting ethically? Explain.
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Bair Company is a manufacturer of standard and custom-designed bottling equipment. Early in December 20x0 Lyan Company asked Bair to quote a price for a custom-designed bottling machine to be delivered in April. Lyan intends to make a decision on the purchase of such a machine by January 1, so Bair would have the entire first quarter of 20x1 to build the equipment. Bair’s pricing policy for custom-designed equipment is 50 percent markup on absorption manufacturing cost. Lyan’s specifications for the equipment have been reviewed by Bair’s Engineering and Cost Management departments, which made the following estimates for direct material and direct labor.
Direct material ............................................ $307,200
Direct labor (11,000 hours at $18) .................. 198,000
Manufacturing overhead is applied on the basis of direct-labor hours. Bair normally plans to run
its plant at a level of 15,000 direct-labor hours per month and assigns overhead on the basis of 180,000 direct-labor hours per year. The overhead application rate for 20x1 of $10.80 per hour is based on the following budgeted manufacturing overhead costs for 20x1.
Variable manufacturing overhead ......................... $1,166,400
Fixed manufacturing overhead .............................. 777,600
Total manufacturing overhead ................... $1,944,000
Bair’s production schedule calls for 12,000 direct-labor hours per month during the first quarter. If Bair is awarded the contract for the Lyan equipment, production of one of its standard products would have to be reduced. This is necessary because production levels can only be increased to 15,000 direct labor hours each month on short notice. Furthermore, Bair’s employees are unwilling to work overtime.
Sales of the standard product equal to the reduced production would be lost, but there would be no permanent loss of future sales or customers. The standard product for which the production schedule would be reduced has a unit sales price of $14,400 and the following cost structure.
Direct material ....................................................................... $ 3,000
Direct labor (250 hours at $18) .............................................. 4,500
Manufacturing overhead (250 hours at $10.80) .................. 2,700
Total cost ...................................................................... $10,200
Lyan needs the custom-designed equipment to increase its bottle-making capacity so that it will not have to buy bottles from an outside supplier. Lyan Company requires 5,000,000 bottles annually. Its present equipment has a maximum capacity of 4,500,000 bottles with a directly traceable cash outlay cost of 18 cents per bottle. Thus, Lyan has had to purchase 500,000 bottles from a supplier at 48 cents each. The new equipment would allow Lyan to manufacture its entire annual demand for bottles at a direct-material cost savings of 1.2 cents per bottle. Bair estimates that Lyan’s annual bottle demand will continue to be 5,000,000 bottles over the next five years, the estimated life of the special-purpose equipment.
Required:
Bair Company’s management plans to submit a bid to Lyan Company for the manufacture of the special-purpose bottling equipment.
1. Calculate the bid Bair would submit if it follows its standard pricing policy for special-purpose equipment.
2. Calculate the minimum bid Bair would be willing to submit on the Lyan equipment that would result in the same total contribution margin as planned for the first quarter of 20x1.
3. Suppose Bair has submitted a bid slightly above the minimum calculated in requirement (2). Upon receiving Bair’s bid, Lyan’s assistant purchasing manager telephoned his friend at Tygar Corporation: “Hey Joe, we just got a bid from Bair on some customized equipment. I think Tygar would stand a good chance of beating it. Stop by the house this evening, and I’ll show you the details of Bair’s bid and the specifications on the machine.” Is Lyan Company’s assistant purchasing manager acting ethically? Explain.
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For several years, a number of Food Lion, Inc., grocery stores were unprofitable
ACCOUNTING
For several years, a number of Food Lion, Inc., grocery stores were unprofitable. The company closed, and continues to close, some of these locations. It is apparent that the company will not be able to recover the cost of the assets associated with the closed stores. Thus, the current value of these impaired assets must be written down.
A recent Food Lion income statement reports a $9.5 million charge against income pertaining to the write-down of impaired assets.
Instructions
a. Explain why Food Lion must write down the current carrying value of its unprofitable stores.
b. Explain why the recent $9.5 million charge to write down these impaired assets is considered a noncash expense.
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For several years, a number of Food Lion, Inc., grocery stores were unprofitable. The company closed, and continues to close, some of these locations. It is apparent that the company will not be able to recover the cost of the assets associated with the closed stores. Thus, the current value of these impaired assets must be written down.
A recent Food Lion income statement reports a $9.5 million charge against income pertaining to the write-down of impaired assets.
Instructions
a. Explain why Food Lion must write down the current carrying value of its unprofitable stores.
b. Explain why the recent $9.5 million charge to write down these impaired assets is considered a noncash expense.
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Beige Corporation operates retail stores in both downtown (city) and Suburban (Mall) locations
ACCOUNTING
1-18 Cost Data for Managerial Purposes
Beige Corporation operates retail stores in both downtown (city) and Suburban (Mall) locations. The company has two responsibility centers; the City Division, which contains stores in downtown locations, and the Mall Division, which contains stores in suburban locations. Beige’s CEO is concern about the profitability of the City Division, which has been operating at a loss for the last several years. The most recent income statement follows. The CEO has asked for your advice on shutting down the City Division’s operations. If the City Division is eliminated, corporate administration is not expected to change, nor are any other changes expected in the operations or costs of the Mall Division.
Beige Computers, City Division
Divisional Income Statement
For the Year Ending January 31
Sales revenue ………………………………………………………………. $12,900,000
Costs
Advertising – City Division ………………………………………… 525,000
Cost of goods sold ………………………………………………… 6,450,000
Divisional administrative salaries ……………………………… 870,000
Selling costs (sales commissions) ……………………………… 1,730,000
Rent …………………………………………………………………………. 2,215,000
Share of corporate administration ……………………….. 1,425,000
Total costs ……………………………………………………………. $13,215,000
Net loss before income tax benefit …………………… $(315,000)
Tax benefit at 40% rate …………………………………………… 126,200
Net loss …………………………………………………………….. $189,000
Required
What revenues and costs are probably differential for the decision to discontinue City division’s operations? What will be the effect on Beige’s profits if the division is eliminated?
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1-18 Cost Data for Managerial Purposes
Beige Corporation operates retail stores in both downtown (city) and Suburban (Mall) locations. The company has two responsibility centers; the City Division, which contains stores in downtown locations, and the Mall Division, which contains stores in suburban locations. Beige’s CEO is concern about the profitability of the City Division, which has been operating at a loss for the last several years. The most recent income statement follows. The CEO has asked for your advice on shutting down the City Division’s operations. If the City Division is eliminated, corporate administration is not expected to change, nor are any other changes expected in the operations or costs of the Mall Division.
Beige Computers, City Division
Divisional Income Statement
For the Year Ending January 31
Sales revenue ………………………………………………………………. $12,900,000
Costs
Advertising – City Division ………………………………………… 525,000
Cost of goods sold ………………………………………………… 6,450,000
Divisional administrative salaries ……………………………… 870,000
Selling costs (sales commissions) ……………………………… 1,730,000
Rent …………………………………………………………………………. 2,215,000
Share of corporate administration ……………………….. 1,425,000
Total costs ……………………………………………………………. $13,215,000
Net loss before income tax benefit …………………… $(315,000)
Tax benefit at 40% rate …………………………………………… 126,200
Net loss …………………………………………………………….. $189,000
Required
What revenues and costs are probably differential for the decision to discontinue City division’s operations? What will be the effect on Beige’s profits if the division is eliminated?
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Hachey Company has accounts receivable of $95,100 at March 31, 2007
ACCOUNTING
Hachey Company has accounts receivable of $95,100 at March 31, 2007. An analysis of the accounts shows these amounts.
Balance, March 31
Month of Sale 2007 2006
March $65,000 $75,000
February 12,600 8,000
December and January 10,100 2,400
November and October 7,400 1,100
$95,100 $86,500
Credit terms are 2/10, n/30. At March 31, 2007, there is a $2,200 credit balance in Allowance for Doubtful Accounts prior to adjustment. The company uses the percentage of receivables basis for estimating uncollectible accounts. The company’s estimates of bad debts are as shown below.
Estimated Percentage
Age of Accounts Uncollectible
Current 2%
1–30 days past due 7
31–90 days past due 30
Over 90 days 50
Instructions
(a) Determine the total estimated uncollectibles.
(b) Prepare the adjusting entry at March 31, 2007, to record bad debts expense.
(c) Discuss the implications of the changes in the aging schedule from 2006 to 2007.
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Hachey Company has accounts receivable of $95,100 at March 31, 2007. An analysis of the accounts shows these amounts.
Balance, March 31
Month of Sale 2007 2006
March $65,000 $75,000
February 12,600 8,000
December and January 10,100 2,400
November and October 7,400 1,100
$95,100 $86,500
Credit terms are 2/10, n/30. At March 31, 2007, there is a $2,200 credit balance in Allowance for Doubtful Accounts prior to adjustment. The company uses the percentage of receivables basis for estimating uncollectible accounts. The company’s estimates of bad debts are as shown below.
Estimated Percentage
Age of Accounts Uncollectible
Current 2%
1–30 days past due 7
31–90 days past due 30
Over 90 days 50
Instructions
(a) Determine the total estimated uncollectibles.
(b) Prepare the adjusting entry at March 31, 2007, to record bad debts expense.
(c) Discuss the implications of the changes in the aging schedule from 2006 to 2007.
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Gwinnett Paper Company manufactures three products (computer paper, newsprint, and specialty paper) in a continuous production process
ACCOUNTING
Gwinnett Paper Company manufactures three products (computer paper, newsprint, and specialty paper) in a continuous production process. Senior management has asked the controller to conduct an activity-based costing study. The controller identified the amount of factory overhead required by the critical activities of the organization as follows:
Activity Activity Cost Pool
Production $495,000
Setup 225,000
Moving 29,750
Shipping 126,000
Production engineering 150,000
The activity bases identified for each activity are as follows:
Activity Activity Base
Production Machine Hours
Setup Number of setups
Moving Number of moves
Shipping Number of customer orders
Production engineering Number of test runs
The activity-base usage quantities and units produced for the three products were determined from corporate records and are as follows:
Machine Number of Number of Number of Number of Units
hours setups moves customer test runs
orders
Computer paper 900 130 290 440 90 1000
Newsprint 1125 60 130 135 20 1250
Speciality paper 450 310 430 625 140 500
Total 2475 500 850 1200 250 2750
Each product requires 0.9 machine hour per unit.
Instructions
1. Determine the activity rate for each activity.
2. Determine the total and per-unit activity cost for all three products. Round all per unit amounts to the nearest whole cent.
3. Why aren't the activity unit costs equal across all three products since they require the same machine time per unit?
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Gwinnett Paper Company manufactures three products (computer paper, newsprint, and specialty paper) in a continuous production process. Senior management has asked the controller to conduct an activity-based costing study. The controller identified the amount of factory overhead required by the critical activities of the organization as follows:
Activity Activity Cost Pool
Production $495,000
Setup 225,000
Moving 29,750
Shipping 126,000
Production engineering 150,000
The activity bases identified for each activity are as follows:
Activity Activity Base
Production Machine Hours
Setup Number of setups
Moving Number of moves
Shipping Number of customer orders
Production engineering Number of test runs
The activity-base usage quantities and units produced for the three products were determined from corporate records and are as follows:
Machine Number of Number of Number of Number of Units
hours setups moves customer test runs
orders
Computer paper 900 130 290 440 90 1000
Newsprint 1125 60 130 135 20 1250
Speciality paper 450 310 430 625 140 500
Total 2475 500 850 1200 250 2750
Each product requires 0.9 machine hour per unit.
Instructions
1. Determine the activity rate for each activity.
2. Determine the total and per-unit activity cost for all three products. Round all per unit amounts to the nearest whole cent.
3. Why aren't the activity unit costs equal across all three products since they require the same machine time per unit?
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2-19 Basic Concepts
ACCOUNTING
2-19 Basic Concepts
For each of the following costs incurred in a manufacturing firm, indicate whether the costs are most likely fixed (f) or variable (v) and whether they are most likely period costs (p) or product cost (m) and under full absorption costing.
1. Energy to run machines producing units of output in the factory.
2. Depreciation on the building for administrative staff offices.
3. Bonuses of top executives in the company.
4. Overtime pay for assembly workers.
5. Transportation-in costs on materials purchased.
6. Assembly line workers’ wages.
7. Sales commissions for sales personnel.
8. Administrative support for sales supervisors.
9. Controller’s office rental.
10. Cafeteria costs for the factory.
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2-19 Basic Concepts
For each of the following costs incurred in a manufacturing firm, indicate whether the costs are most likely fixed (f) or variable (v) and whether they are most likely period costs (p) or product cost (m) and under full absorption costing.
1. Energy to run machines producing units of output in the factory.
2. Depreciation on the building for administrative staff offices.
3. Bonuses of top executives in the company.
4. Overtime pay for assembly workers.
5. Transportation-in costs on materials purchased.
6. Assembly line workers’ wages.
7. Sales commissions for sales personnel.
8. Administrative support for sales supervisors.
9. Controller’s office rental.
10. Cafeteria costs for the factory.
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Crest Industries sells a single model of satellite radio receivers for use in the home
ACCOUNTING
Exercise 3-33 CVP with Income Taxes
Crest Industries sells a single model of satellite radio receivers for use in the home. The radios have the following price and cost characteristics:
Sales Price …………………………….. $ 80 per radio
Variable costs ………………………. $32 per radio
Fixed costs ……………………………... $360.00 per month
Crest is subject to an income tax rate of 40 percent.
Required
How many receivers must Crest sell earn a monthly operating profit of $90,000 after taxes?
How many receivers must Crest sell earn a monthly operating profit of $90,000 after taxes?
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Exercise 3-33 CVP with Income Taxes
Crest Industries sells a single model of satellite radio receivers for use in the home. The radios have the following price and cost characteristics:
Sales Price …………………………….. $ 80 per radio
Variable costs ………………………. $32 per radio
Fixed costs ……………………………... $360.00 per month
Crest is subject to an income tax rate of 40 percent.
Required
How many receivers must Crest sell earn a monthly operating profit of $90,000 after taxes?
How many receivers must Crest sell earn a monthly operating profit of $90,000 after taxes?
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I am going to work for a hospital, which is a not-for-profit organization. Because there are no profits, I will not be able to apply any CVP analysis
ACCOUNTING
Exercise 3-16 “I am going to work for a hospital, which is a not-for-profit organization. Because there are no profits, I will not be able to apply any CVP analysis in my work.” Do you agree with this statement? Why or Why not?
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Exercise 3-16 “I am going to work for a hospital, which is a not-for-profit organization. Because there are no profits, I will not be able to apply any CVP analysis in my work.” Do you agree with this statement? Why or Why not?
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Saturday, August 20, 2011
Argentine Partners is concerned about the possible effects of inflation on its operations
ACCOUNTING
Argentine Partners is concerned about the possible effects of inflation on its operations. Presently, the company sells 60,000 units for $30 per unit. The variable production costs are $15 and fixed costs amount to $700,000. Production engineers have advised management that they expect unit labor costs to rise by 15 percent and unit materials costs to rise by 10 percent in the coming year. Of the $15 variable costs, 50 percent are from labor and 25 percent are from materials. Variable overhead costs are expected to increase by 20 percent. Sales prices cannot increase more than 10 percent. It is also expected that fixed costs will rise by 5 percent as a result of increased taxes and other miscellaneous fixed charges. The company wishes to maintain the same level of profit in real dollar terms. It is expected that to accomplish this objective, profits must increase by 6 percent during the year.
a. Compute the volume in units and the dollar sales level necessary to maintain the present profit level, assuming that the maximum price increase is implemented.
b. Compute the volume of sales and the dollar sales level necessary to provide the 6 percent increase in profits, assuming that the maximum price increase is implemented.
c. If the volume of sales were to remain at 60,000 units, what price would be required to attain the 6 percent increase in profits?
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Argentine Partners is concerned about the possible effects of inflation on its operations. Presently, the company sells 60,000 units for $30 per unit. The variable production costs are $15 and fixed costs amount to $700,000. Production engineers have advised management that they expect unit labor costs to rise by 15 percent and unit materials costs to rise by 10 percent in the coming year. Of the $15 variable costs, 50 percent are from labor and 25 percent are from materials. Variable overhead costs are expected to increase by 20 percent. Sales prices cannot increase more than 10 percent. It is also expected that fixed costs will rise by 5 percent as a result of increased taxes and other miscellaneous fixed charges. The company wishes to maintain the same level of profit in real dollar terms. It is expected that to accomplish this objective, profits must increase by 6 percent during the year.
a. Compute the volume in units and the dollar sales level necessary to maintain the present profit level, assuming that the maximum price increase is implemented.
b. Compute the volume of sales and the dollar sales level necessary to provide the 6 percent increase in profits, assuming that the maximum price increase is implemented.
c. If the volume of sales were to remain at 60,000 units, what price would be required to attain the 6 percent increase in profits?
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Nealon Inc: The balance sheet that follows indicates the capital structure for Nealon Inc
FINANCE
Assignment:
Weighted Average Cost
Complete the Mini Case on page 368 and submit to instructor. In parts "a" and "b" clearly label the calculation of the required ratios and solve using Excel. Use formulas to calculate the ratios and format the cells to insert a comma if there is more than three numbers. Round to two decimal places. No narrative analysis is called for, so clearly label the calculations so that management will be able to comprehend them.
Mini Case
The balance sheet that follows indicates the capital structure for Nealon Inc. Flotation costs are (a) 15 percent of market value for a new bond issue, and (b) $2.01 per share for preferred stock. The dividends for common stock were $2.50 last year and are projected to have an annual growth rate of 6 percent. The firm is in a 34 percent tax bracket. What is the weighted average cost of capital if the firm’s finances are in the following proportions?
TYPE OF FINANCING PERCENTAGE OF FUTURE FINANCING
Bonds (8%, $1000 par, 16-year maturity) 38%
Preferred Stock (5,000 shares outstanding, $50 par, $1.50 dividend) 15%
Common Equity 47%
Total 100%
a. Market prices are $1,035 for bonds, $19 for preferred stock, and $35 for common stock. There will be sufficient internal common equity funding (i.e. retained earnings) available such that the firm does not plan to issue new common stock. Calculate the firm’s weighted average cost of capital.
b. In part a we assumed that Nealon would have sufficient retained earnings such that it would not need to sell additional common stock to finance its new investments. Consider the situation now, when Nealon’s retained earnings anticipated or the coming year are expected to fall short of the equity requirement of 47 percent of new capital raised. Consequently, the firm foresees the possibility that new common shares will have to be issued. To facilitate the sale of shares, Nealon’s investment banker has advised management that they should expect a price discount of approximately 7 percent, or $2.45 per share. Under these terms, the new shares should provide net proceeds of about $32.55. What is Nealon’s cost of equity capital when new shares are sold, and what is the weighted average cost of the added funds involved in the issuance of new shares?
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Assignment:
Weighted Average Cost
Complete the Mini Case on page 368 and submit to instructor. In parts "a" and "b" clearly label the calculation of the required ratios and solve using Excel. Use formulas to calculate the ratios and format the cells to insert a comma if there is more than three numbers. Round to two decimal places. No narrative analysis is called for, so clearly label the calculations so that management will be able to comprehend them.
Mini Case
The balance sheet that follows indicates the capital structure for Nealon Inc. Flotation costs are (a) 15 percent of market value for a new bond issue, and (b) $2.01 per share for preferred stock. The dividends for common stock were $2.50 last year and are projected to have an annual growth rate of 6 percent. The firm is in a 34 percent tax bracket. What is the weighted average cost of capital if the firm’s finances are in the following proportions?
TYPE OF FINANCING PERCENTAGE OF FUTURE FINANCING
Bonds (8%, $1000 par, 16-year maturity) 38%
Preferred Stock (5,000 shares outstanding, $50 par, $1.50 dividend) 15%
Common Equity 47%
Total 100%
a. Market prices are $1,035 for bonds, $19 for preferred stock, and $35 for common stock. There will be sufficient internal common equity funding (i.e. retained earnings) available such that the firm does not plan to issue new common stock. Calculate the firm’s weighted average cost of capital.
b. In part a we assumed that Nealon would have sufficient retained earnings such that it would not need to sell additional common stock to finance its new investments. Consider the situation now, when Nealon’s retained earnings anticipated or the coming year are expected to fall short of the equity requirement of 47 percent of new capital raised. Consequently, the firm foresees the possibility that new common shares will have to be issued. To facilitate the sale of shares, Nealon’s investment banker has advised management that they should expect a price discount of approximately 7 percent, or $2.45 per share. Under these terms, the new shares should provide net proceeds of about $32.55. What is Nealon’s cost of equity capital when new shares are sold, and what is the weighted average cost of the added funds involved in the issuance of new shares?
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